Inefficient chronic loss-makers which need a constant supply of funds - what does this remind you of?
23-Jun-2022 •Dhirendra Kumar
I may be six years late with this recommendation. Still, if you want to understand what exactly is going on with the new digital businesses that are said to be disrupting the whole world, then you should read a book named 'Disrupted: My Misadventure in the Start-Up Bubble'.
This is not a boring old business book but a funny and fascinating first-hand account from inside such a company. It's written by a man named Daniel Lyons, who, at the age of 50, switched careers from being a journalist working at Newsweek to managing the company blog at Hubspot, an 'inbound marketing company based in Boston, USA. Hubspot is a sixteen-year-old company with revenues well in excess of a billion dollars but has never made a profit. It's a listed company that has made its founders and funders fabulously rich.
About a third of Lyons's book is a hilarious account of the self-absorbed excesses and lunacy of Silicon Valley's tech culture. However, we are at a stage when the point-and-laugh genre about Silicon Valley is now well-established and not a surprise. Notably, Lyons played an important role in creating this genre. From 2006 till about 2010, he wrote the parody blog 'Secret Diary of Steve Jobs' and was later a co-producer and writer on the HBO series 'Silicon Valley'.
However, Disrupted goes well beyond that. Lyons makes it clear that there is nothing fundamentally new about what a certain breed of supposedly 'tech' companies are doing. They are good, old-fashioned cons, designed to make large amounts of money for the founders and funders, in the process destroying the lives of ordinary employees and the money of investors. Please note that I make the distinction between funders and investors - the distinction is important for listed companies, as we in India have found out recently.
In the tech world, there are only a handful of Google or Amazon types of businesses that are successful. The larger numbers are like Uber or WeWork or dozens of others, which have never made money and probably never will. There are many of them in India too. These kinds of companies are deeply damaging to the ability of the free market economy to generate wealth and real economic growth. That may sound surprising, but please bear with me for a moment.
Why is it that a market economy generates much more wealth and growth than a controlled one? The reason is a failure. The greatest advantage of a market economy is actually not just that good businesses succeed, but that bad ones fail. Businesses that can't make money are forced to shut down quickly, freeing up resources of all kinds that go into good businesses.
The entire ecosystem of the so-called tech sector now works in the opposite way. Capital keeps flowing into businesses that are unsustainable, not just for months and years but soon for decades. This creates a huge distortion in every way for employees, competitors as well as customers. Around the world (including in India to some extent), traditional taxi services have been disrupted by Uber, Lyft and others like them. Now, these companies are increasing prices, still not making money, and have damaged customers and drivers as well as the older taxi services. In recent months, quick grocery delivery services have started this kind of disrupting on traditional grocery shops. Can we forecast where this will lead to? It's pretty obvious.
In fact, this new tech sector most closely resembles India's old public sector. Money keeps coming in without any need for profits or efficiency, and eventually, it becomes an economic disaster. In some sense, there was some excuse for it till the money was from foreign VCs and other investors. However, now that the con has shifted to the Indian equity markets, another class of potential victims has been added to the growing list - the Indian retail investor.